Today we are going to be talking to Erik Huberman. Erik found that discovering a company’s unfair advantage and exploiting it through digital marketing and sustainable business processes can take a company and its profits to new heights.
Erik is the current owner of Hawke Media, has sold multiple companies and is on the Forbes 30 Under 30. He started Hawke Media three years ago with just seven employees and he has scaled it to 150 employees today. He’s also a cofounder of Arrowroot Capital. Today, we’re going to talk about how to build a sustainable business that is profitable and that gives you the option to sell whenever you want. Erik will explain the three pillars of marketing and how to make good decisions.
In This Episode You’ll Learn:
- How Erik grew up with the entrepreneurial mindset, as well as how he went from small opportunities to a full-fledged business.
- Some of the things Erik has done to accelerate the growth of Hawke Media.
- Some of the things Erik did that ended up paying off when it came time to exit despite not building with the intent of selling.
- How he ended up selling his first business.
- How Erik’s mindset has changed when it comes to valuing companies.
- The dynamics Erik uses when setting up deal structures for either investing or selling.
- The types of industries and unfair advantages that Erik looks for when determining whether or not to take a risk.
- Some things that Erik has seen work and not work when it comes to raising funds.
- The three marketing pillars that Erik focuses on: Nurturing, awareness, and trust. He also talks about what most people are missing the most when it comes to these pillars.
- Erik’s top tip on hiring people.
- Erik’s definition of a sustainable business
- The importance of knowing what your unfair advantages are and leveraging them.
- The importance of knowing how you can let the world know about your unfair advantage and what unique value you can bring to others.
- The importance of knowing how you can build a sustainable and profitable business that will give you exit options later.
Links and Resources:
About Erik Huberman:
Erik Huberman is the Founder & CEO of Hawke Media, a full-service Outsourced CMO based in Santa Monica, CA that launched in 2014 and has been valued at $60 million. In just 3 years, Hawke Media has grown from 7 to over 120 employees and has serviced 400+ brands including Raden, BeautyCon, Bottlekeeper, The Ridge Wallet, Buscemi, Red Bull, Evite, Verizon Wireless, HP. Hawke Media was recently named on the Inc 5000 list of “Fastest Growing Company’s” of 2017, one of CIOReview’s “Top 20 Most Promising Digital Marketing Solution Providers in 2017”, and a recipient of a gold STEVIE Award in the American Business Awards for “Company of the Year”.
As a serial entrepreneur and brand marketing expert, Erik Huberman is a sought-after thought leader in the world of digital marketing, entrepreneurship, sales, and business. Prior to Hawke Media, Erik founded, grew and sold Swag of the Month and grew Ellie.com‘s sales to $1 million in four months. Erik is the recipient of numerous honors and awards including Forbes “30 Under 30”, Inc Magazine’s “Top 25 Marketing Influencers”, Influencive’s “Top Influencive Influencers of 2017”. Erik is a regular contributor to major media publications like Forbes, Entrepreneur, and Business Insider and is proud to have and recently joined XPRIZE as their key marketing advisor.
Read on for the full transcription:
Ryan: Welcome back to the Life After Business Podcast. Today’s guest’s name is Erik Huberman. Erik is on the Forbes 30 Under 30. He has sold multiple companies and he’s the current owner of Hawke Media which is an outsourced marketing company that Erik started 3 years ago with 7 employees and has scaled it to 150 employees and works with some of the biggest brands like Red Bull.
Erik has been addicted to growth since his early childhood, and has been applying his passionate addiction in extremely beneficial ways with his couple companies that he’s sold and for his current clients. Erik also is a cofounder of Arrowroot Capital and they have 27 companies in their portfolio that they invest in.
On today’s episode, Erik and I talk about how to build a sustainable business that is profitable, that has options to sell whenever you want. Also, we talk about what are the strategic valuations that venture capitals and angel investors look at and how they actually come into evaluation if you’re looking to raise money and partner with a company like Arrowroot Capital.
Erik explains the three pillars of marketing and how a lot of the companies, regardless of the industry or the maturity, have to make some decisions about where they’re missing the mark in digital marketing and online sales and then how to put fuel behind that to hit the growth projections that they need to eventually have those exit options that you want.
I really hope you enjoy this episode with Erik. He shares a lot of different wisdom through the ventures that he’s in and the exits that he’s been a part of. Without further ado, here’s my interview with Erik.
Good morning, Erik. How are you doing?
Erik: Good. How are you doing?
Ryan: Doing good. I’m really looking forward on having you on the show. You’ve done a lot of stuff at your age and I’m looking forward to hearing the different steps throughout your journey. For our listeners, can you go back to the first time that you really decided to jump in and become an entrepreneur?
Erik: There’s a couple, I don’t know which counts, so to speak. I don’t know if I should tell you this but when I was a little kid, my dad actually, to his credit, got me hooked on the idea of building wealth. He got me excited about the idea of owning a $50 bill and owning a $100 bill, not to buy anything, just the intrinsic value. I actually got super hooked to finding change and stuff to actually get up to that point. So what I ended up doing when I was six was taking a bunch of my parents’ things, throwing them into a trash bag, and trying to sell my parents’ stuff door to door.
Ryan: That’s awesome.
Erik: I didn’t understand the part where money actually then pays for something. It was just like I’m supposed to make money. When I was eight, I wanted an electric guitar and I asked my dad if I could get an electric guitar because my name is Erik. The only other Erik I knew was Eric Clapton, and so I needed to be a guitarist. I said, “Dad, I want an electric guitar.” His response was good, “Get a fucking job.”
Not being able to get a job at eight years old, I actually started buying and selling Beanie Babies to make money, right in the middle of the Beanie Baby craze. I had no actual passion for Beanie Babies, I just saw an opportunity. Then I ended up making a few thousand dollars at eight years old. I bought the guitar, bought a BMX, saved some money for a car. It was pretty fun.
Ryan: That’s awesome. I’ve got two twin one-year old girls and we just found our huge stash of Beanie Babies. That’s really funny, I just brought that up. I saw you also were selling Cutco. I used to sell a little bit of knives back in the day as well.
Erik: Nice. In terms of hiring people, if I can find people that have Cutco experience, it’s a no-brainer. We have a few employees—there’s actually a tangible difference and it’s insane.
Ryan: They definitely put the training to a whole different level. How did you go from the different little journeys that you’re talking about there into actually a full-fledged operational business?
Erik: It’s funny, it kind of progressed slowly. I’ve had five actual businesses, filed corporations, did it officially, raise money sometimes or not but had real businesses. The first one was on the summer of my junior year in college. My friend found that the state of California had passed a law that you have to filter your storm drains and no one was doing it. So he came up with this idea but needed someone who understood marketing and sales to help him.
I had just broken a bunch of records with Cutco as you mentioned it. He’s like, “Hey, you’ve got sales. Come help me build this.” That was the first. But the thing is, we weren’t sure if I was going to drop out of school in my senior year or go back or what. I did it for the summer and frankly realized, I didn’t want to filter storm drainage for the rest of my life, so I went back to school.
What I’m highlighting is I kind of dipped my toe into entrepreneurship there while along the way had other little entrepreneur endeavors. When I got out of college, I actually went into real estate full-time for a year. I started a week before the entire banking industry collapsed. As a commercial real estate agent—
Ryan: I know.
Erik: It was still entrepreneurial. I didn’t make any money unless I sold something. I kept my own hours. My manager was there more as a guide than a traditional manager, because he didn’t actually pay me anything. But it was still enough structure I think, that when I went off a year later to start—I started working on a side project six months later, but a year later, I left to go pursue my first ecommerce company. I already had a bunch of disciplines, and a bunch of things that were guided so that I could really go full-fledge. From there, I’ve had three ecommerce companies and now Hawke Media.
Ryan: What I love about your background is you’ve got two sides of the coin of really growth acceleration and then also the exits too because I think they go hand in hand. A lot of entrepreneurs, they just chase revenue and growth for growth’s sake but then you’ve also gone through these exits.
Let’s focus maybe on the growth too because you’ve got, which is what you’re doing, Hawke Media, how are you finding opportunities and then lighting the fire behind growing these companies at the rate that you have. With Swag Of The Month, you’ve really put some numbers behind your companies that you started. What are some of the things that you’re doing to accelerate the growth?
Erik: I would say a few things. One is I almost have an addiction to growth. I like growing things. It’s similar to like the six-year old running around, selling things of my parents. It’s not about the money, and that’s a very high-class statement to make. There’s all those studies, once you make $70,000 a year, your happiness and your stress goes away. Really after a six figure paycheck, it’s not about the money, it’s about something inherent, something that drives growth, for me, I always really cared about that. I always focus on it. Through focusing on it, I became pretty good at it.
It’s like I was always looking for how do I grow this faster as opposed to a lot of other people have different priorities in their business but I always wanted scalability and growth. I was able to achieve it. I throw tons of things at a wall, and I got this advice early on from a guy named Chris Nella who ran acquisition marketing for Shoedazzle, GameFly, Soul Society, Tradesy, and now Thrive Market. It’s quite a resume.
He gave me advice when I was first starting Swag Of The Month, my second ecommerce company. He said, “Yeah, marketing is just trying a bunch of shit and then doubling down where it works. You just have to test all the time.” I actually set up a framework to test properly but that’s really it.
Ryan: I’ve been following Digital Marketer, all the different people, you’ve got a lot of traditional businesses getting into ecommerce or have a nice little hybrid of both. I think everybody is doing exactly what you’re saying which is trying a bunch of shit as they’re trying to figure out how to scale their companies and grow. What are some of the things that you’ve seen in your different ventures that have really stuck and have been now then integrated to your process to keep scaling?
Erik: It’s been negatives and positives with each one. I learned in my first company, we targeted independent musicians and get one on one business coaching to help them grow. It was a great product, we had a bunch of success stories but at the end of the day, having independent artists who are usually struggling for money as a customer was terrible. I learned that in some ways you don’t pick your customer and then in some ways you do. Just make sure that you’re setting yourself up for success there.
Swag of the Month, I learned all the problems of scalability and why—unit economics I already knew are important but still there’s a level of scale you have to get to before those unit economics come into play. It was a $17 subscription company. Even if our profit was $10 a person, $10 doesn’t go very far. We needed a lot of customers for it to mean anything. That was another lesson that I really took with me.
With Ellie, the last company, it really came down to—I’m trying to think of the best way for this—with Ellie, it came down to, they gave me a large budget frankly, and I’ve got to try everything. I actually really learned how to manage a really large marketing budget. $2 million with a brand new company and they’re like, “Go, do whatever you want.” I was used to being scrappy and then got to just take off.
Ryan: Like a nice little kid in a candy shop, experiment. As you’re putting literally rocket fuel behind the marketing of these things, the biggest challenge is also growing intrinsic value because you’ve exited these companies as well. Are there certain things that you saw through these journeys that were very valuable when you actually came to the exit along with going through them while you owned the current company?
Erik: Can you repeat that question?
Ryan: As you’re scaling these businesses and as you’re growing and your revenues are going up that far, when you’re putting the dollars behind these different marketing tactics, was there certain things that you were putting in the operational or automating or repeating that when you saw the value, when you ended up selling the business because of that ease of transferability or of repeatability?
Erik: It’s funny, yes, we had certain things that were repeatable but that’s not usually why people bought my businesses. The few businesses that I sold were more for brand and customer base than processes and repeatability.
Ryan: Let’s fuel that back a little bit.
Ryan: First of all, when you’re scaling these with the end in mind, knowing who your potential exits might be, what was your thought process around the timing and where you were going to eventually go with the business? What was the triggering event? Give us a little bit of narrative around the exits.
Erik: Sure. That’s the irony. No, I actually have never built a business with the intent of selling. I always know it’s an option. But don’t really aim for that because you can build a sustainable business on your own, if that works, you can sell it. There’s definitely a lot of businesses that don’t build a sustainable business and sell but I don’t really like that game. It’s not really for me.
The first business I sold, Swag Of The Month, we’re almost in the position where we had to sell. We got to a point where, back to that scalability point, it was tough. When we had a bunch of subscribers and it was working and making good money, after always setting down on expenses and covering our own bills, etc., there wasn’t a lot left over so it was really hard to hire people to scale the business.
We learned the reason why people raise money, frankly. We got to the point where it was like we can either raise money, sell the thing, or shut it down because we couldn’t perpetuate what we’re doing with some cash flow.
I actually got a meeting with a guy named Howard Morgan who was one of the founders of First Round Capital. Which frankly, he’s like a legend in the venture capital world. I didn’t know any of this. I didn’t know anything about VC. I met with him and he thought that it was a great idea but he had just invested within this company called fab.com which if you don’t know, ended up being a huge disaster in the VC world. He said he couldn’t invest because of it.
The guy have been incredibly successful I wasn’t meant to be demeaning. There weren’t all these podcasts talking about venture capital or selling a business, I didn’t know much about it, but at that point, I was like, “Well, I met the VC, he said no. I guess we’re moving on, there’s no other VCs out there.” It wasn’t like you’d reach out to 50 to 100 VCs.
Ryan: Just like the Cutco days, right?
Erik: It was just like, “Yeah, it’s done. Okay, next.” I moved on so then it was sell or shut down. Right then actually, a contact of mine reached out out of the blue and said, “Hey, I don’t know if you’re interested in selling your business but if you are, I’d like to talk about it.” It was just serendipitous. I took a meeting, told her how much we wanted for it and she wrote a check on the spot and bought the business.
Ryan: Did you think that you didn’t ask enough?
Erik: I mean, that’s definitely a case, but I was always happy with it. I could have gotten more obviously. I go, “This is how much.” And they go, “Yeah, okay. Here’s the check.” It’s like, “Oops,” but at the same time, I don’t regret it. I was always in the position where I had other things to move on to. It was actually nice enough and again, we didn’t have a lot of options. It was in a tough place.
Ryan: From sitting down with Howard Morgan, did you have any conversations about how he would have valued the business and how did you come up with that number when you eventually sold it? Did you use any tidbits that you learned from Howard on that call? Where were you getting that number from?
Erik: I can’t remember the number that we used to be honest but I think I might have it somewhere. I’m literally on my computer looking for the number. With him, we actually didn’t get that far, we talked more about the business and he looked over everything. He did look over a deck which I’m trying to remember, I’m looking at it now. Yeah, we had numbers. We were trying to raise $1,000,000. But I don’t think we established a valuation.
Ryan: Got it. When you came up with a number as you were actually selling it to the buyer, was it a number that you had just pulled out of the air to figure out what you could go on and do something else or did you have a multiple EBITA or revenue or anything?
Erik: No. Again, there was no valuation. We had no idea what we’re doing with VC. It was like, “I need $1 million. We’ll just negotiate with that.”
Ryan: With Swag Of The Month and then Ellie, and then now what you’re doing with Hawke, you are also an investor, correct?
Ryan: How has your mindset changed in how you value companies? When you’re looking for value, what is it that you’re looking at? Is it cashflow, is it niche, is it some sort of IP?
Erik: It’s strategic advantage. It’s why are these guys going to beat everyone else out? I’ve heard it being talked about more and more but I was so surprised early on when I got into investing that this thing come up a lot. It’s like, why are these people going to succeed and what unfair advantage do they have? Because if someone is just starting a business because they have a good idea, good luck.
You have to have something that will propel you past everyone else because you have something so solid as far as strategic, you can’t lose. That’s what I look for, or I look for where can we be that acceleration. We’ve got about 170 active clients. Is it a software that all of our clients can use? Those kind of things, so that we can become that unfair advantage is also an option.
Ryan: That’s interesting. Let’s go back to the first point you were making. This unfair advantage, what are some of the examples that you’ve seen that have given you the confidence that you need?
Erik: Let’s see. FabFitFun is a good example and it worked. That was my first angel investment. FabFitFun is an ecommerce subscription box. This year, they’ll do about $115 million profitably, and they’ve only raised $6,000,000. Just to give an idea. With them, they started as an email newsletter. They had a huge email list before they ever launched ecommerce, within it they raise the ecommerce business. When they went to launch it, they have every customer already in their database, they just need to mine that database. That’s an unfair advantage. Good job competing with that.
Ryan: If you’re taking a company like that that you’re investing in, how are you looking at the value that you would pay for because obviously, you’re looking for the unfair advantage. Do the people usually know it, the sellers or the people looking to raise money? Then, how do you place the valuation on that strategic investment or acquisition?
Erik: I actually don’t play any games in terms of valuation with entrepreneurs. I want someone smarter than me. Currently on paper, my best investment is a less than one-year old business. I can’t talk about it because they want to stay still. But it looks like they’re going to do about $55 million in their first year. They’ve already cash flowed like $20 million. The entrepreneur in it is honestly brilliant. I didn’t play games with the valuation.
We came to a deal we’re both happy with. To this day, we came into deal, we’ve made, I’d say in terms of our investment on that, I think we’re about in one year, 30 times our investment. There could be a tendency to look into our pocket as an entrepreneur and be like, “I just made you 30 times your money in a year. You are overpaid.” But because we set up the deal in a way that was so fair and we didn’t argue anything, he’s totally happy. He’s like, “Good job. You bet on me early, we worked.” He’s excited.
Ryan: That’s awesome. You know the reason why I’m peeling the deal structures, the terms and the valuations is because it’s so different when you’ve got an immature business that’s been clipping away at the 5% to 7% increase and you’re looking at the EBITA and there’s even a multiple or discounted cash flow versus the strategic valuation. It’s so different because it’s a synergies of partnerships and people and talent. The valuation or how you come to that, I think is a complicated situation.
I’ve got a friend that is looking to raise some money right now. There’s not a whole lot of play books around it because it comes down to negotiation. As far as the valuation, that’s why I was kind of going into that, but also the deal structure, what are the typical ways that you’ve seen when you were selling your companies or now you’re investing, that you’re structuring these deals whether it’s an ownership percentage or board seats? Give us a little bit of a rundown of the dynamics that you end up setting up.
Erik: We’ve got 27 portfolio companies here. Some of those are straight check investments as angel investors, some of those are hybrid services, equity, cash deals, sometimes they’re advisory positions. We’ve actually built a team here around servicing those so that we can give them, again, it’s all about that unfair advantage, we wanted to give them an unfair advantage.
We haven’t actually taken an official board seat but we actually influence the company so much, because of what we have access to as Hawke Media, 115 people here running marketing for hundreds of brands. We can do a lot for companies’ companies. They let us have a lot of influence no matter what and we have a full team that is dedicated to that if you put in the time versus in venture capital, you’re not making enough cashflow to have teams dedicate these things for us.
We’re actually taking a piece of the overall revenue of Hawke Media to hire a team to service these because we see it as a high risk high reward size of our business.
Ryan: That’s super interesting. That’s one of the biggest things that I have seen, when you have successful transactions like that, where it’s not just about the money, it’s about the leverage and the skills sets and the network because that’s where the value actually happens versus just having someone that’s going to fund you and sit there and dictate and micromanage you. Explain a little bit because I think it’s very interesting how you’ve leveraged Hawke Media and these portfolio companies, can you shed some light about how the dynamics and the relationships work?
Erik: Basically, obviously, it depends on the business. Certain businesses we actually are pretty passive with. FabFitFun at this point has by monthly to quarterly meetings to catch up and talk about strategies. They’ve got an amazing team over there. They don’t need a lot from us. But then there’s other companies that are on earlier stage that we come in and basically take over a big chunk of their marketing department or the whole thing in exchange for parts ownership and sometimes part cash.
Then, there’s the third piece which is investing and then coming on as an active advisor as well. And actually even a fourth piece where we’re not necessarily running their marketing but we’re acting as an advisor for equity. Again, we have all these four different positions and with each one, we try to just bring our network, our connection, our clients, our knowledge, everything we can to make it a better company.
Ryan: I like it. I think before we go into a couple more questions, can you explain exactly what your services are at Hawke Media because I think the tie of what you’ve successfully done and how your growth associated with Hawke Media and the practices that you apply for your customers allows other—regardless of the industry scale up. Because I think in today’s world, I mean, every client that I have, everybody that I talk to, growing their companies is the biggest challenges. I came from the copier and IT services world. It was the old Cutco model of telemarketing and knocking on doors which just doesn’t work anymore.
I think what you’re doing is scalable because you’ve got the business, the infrastructure, and you can also apply it to various industries. Give us a little bit of a backdrop on exactly Hawke Media and what the practices are that you’re doing that are working so well across these industries.
Erik: After all of those ecommerce companies I mentioned, the three, after I sold the last one, I started advising and consulting for a bunch of brands. I kept running through the same challenges that I ran over with my own which is when it came time to execute, it’s tough because there’s two options. It’s hiring an in-house team or hiring agency. What I found with hiring in-house isn’t cost-effective, that’s if you could find a talent but on the agency side, it seems like 98% of the agencies have no idea what they’re doing.
Ryan: Maybe 99%.
Erik: Just to be real. Yeah, exactly. Everyone’s experienced this. It’s like I’m not preaching to the choir. The few that are good though tend to be really expensive or want long contracts or have some other barrier they put up that makes them hard to work with. I got sick of it, decided to hire my own team. We started with seven people, an email marketer, Facebook search influencer, affiliate, web design and overall strategy. I went back to these companies and said, “Everything is a la carte month to month, cheaper than hiring in-house but basically, we can spin up a team that fits your needs based on this menu of services.”
That’s how we started. Fast-forward, it’s been three and a half years. We’ve grown from 7 to about 115 people. Our services have obviously expanded quite a bit. But it’s this idea that we’ll go to a company, identify their holes and their expertise or bandwidth and then spin up with people overnight that can actually take that piece over.
Ryan: I think it’s something that really a lot of entrepreneurs are challenged with because in order to exit and actually get the top dollar for your company, you need to be growing at a predictable, successful rate and I think a lot of people are just running into walls constantly whether it’s digital marketing. It’s the whole combo of all the things that you have to do to be out there these days to keep the growth coming in. Because I believe that a lot of people do have a competitive idea or specific skillset but they don’t have an idea how to get their voice out.
You’ve got Hawke Media and the infrastructure, are there certain industries that you’re applying and looking for out of these 27 portfolio companies or the ones that you’re looking at down the road? What kind of industries, what kind of unfair advantages are you looking for?
Erik: Again, it’s either a distribution channel, it’s expertise that don’t exist in other places, it’s some infrastructure that’s already being built or leveraged for this business. In terms of unfair advantage, there’s a lot of different ways it can manifest. It just really depends. As far as we look at, it’s either companies that we know how to grow. I guess we have three investment criteria or channels, so to speak.
Companies that we know we can grow using our platform, companies that are good for our clients, software companies, things like that that we can utilize. Then the third one is just opportunistic, we like the team, we like what they’re doing, and we’re just going to come in as a partner just because there’s something there. The third one’s a little harder. I think that’s going to be where we’ll probably lose some money.
Ryan: It’s worth the risk.
Erik: It’s worth the risk and we hope for the best and it’s fun too. But they’re the ones that we just think that there’s something there and these people are super smart and we got asked to come into the round but it’s not necessarily anything we can affect which is harder to justify.
Ryan: Are there any of these portfolio companies that you guys have gone through the exits with together with the people that have founded the companies?
Erik: No. Our first investment I think is only two years old. We haven’t gotten to the point of exits yet. We’ve gotten plenty of raised money for new rounds and stuff like that. But we’ve not actually exited because we’re getting in early. We haven’t invested in any late stage companies.
Ryan: Explain a little bit of the process that you’ve gone through now because you’re providing some funds but then you’re also going out and helping people raise some funds. What are some of the couple main takeaways that you’ve seen that have worked really well and some that have not worked very well?
Erik: In terms of raising money, I’m always cautious with people about raising money. That’s why [00:28:44] I think it’s incredible that the guys raised $6 million then just built a profitable business and they’re at $150 million in revenue. I understand that at some point, a lot of companies have to but because I’ve been there, avoid it at all costs. There’s a lot of complicated ways to do it and just depending on what you’re dealing with.
I’m trying to think of an example, sometimes you may want to take on debt, sometimes you may want to take on equity financing. The right VC or the right investor makes the difference. If you’re going to take money from someone, hope that they’re strategic, don’t just take the money because the guy has money. Generally even on the other side, if someone just wants to take your money because it’s money, that’s worrisome. That means that they’re not thinking about this in a complex enough way and that worries me about how they think about their business in general. There’s a lot of things that come into play here.
Ryan: When you’re doing that, you’ve been part of these situations, how are you actually getting down to the valuation? Just hopefully, some of them are running stable businesses where they got cashflow and not just an idea. How do you get to a point where you’re figuring out whether it is debt, whether it is one of your four roles to coming up with that valuation to say, “Okay, here’s exactly what the money is going to be and here’s what it’s going to be used for and here’s what we’re going to need in return”?
Erik: Because again, the deals we’re dealing are early staged. Usually, it’s just a conversation. If anyone tries to claim that there’s a science to valuation in the venture world, they’re full of shit. I can say that by looking at the valuations companies get. Private equity is a whole different world. That’s valued off usually trailing 12 months cash flow. That’s the way you do it. But you can’t really do that in venture because it’s all the upside and what you think. It’s usually just a conversation of what makes sense based on what they have and what works, whether it’s been invested already etc, and we just talk it out and decide what we feel good about. It’s kind of a gut check.
Ryan: I agree with you on that one. Like you said, I think people need to think that there should be a science to it but it’s really not.
Erik: There can’t be because that’s the thing about ventures. I invested in one company that frankly, if things go well, they can maybe sell for $15 million or $20 million. It’s not going to be a massive business but they’re raising $300,000 and a $2 million valuation. We hope in a year, it’ll sell at $15 million. That’s okay.
Then there’s other companies like we invested in another company with $12 million valuation. We invested on a pro-rata on that company that’s going to do $55 million this year. They just finished around $12 million. Again, they’re going to do $55 million this year, like yeah, no-brainer. They haven’t done it yet so they can’t raise against that but I’m very involved in the business, I’m confident in the CEO so I wasn’t worried about it. Again, the valuations are all over the place, it’s depending on what’s going on with the business.
Ryan: When you’re getting out, let’s say the transaction’s complete and you guys are now, one of your four roles, you’re looking at it, as far as the marketing in the growth side, what are the ways that you go in to assess what they’ve got going on and then where do you focus on first?
Erik: We focus on whatever is missing. We look at marketing in three pillars, nurturing, awareness, and trust. Awareness is like advertising, get your brain out there. Nurturing is what do you do to take that awareness and turn it into a sale. Trust, 75% of the people say the most important, this is [00:32:15] studies, say the most important factor in a purchase decision is trust, building that trust through press, third party validation and influencer marketing and things like that. What we do is we go and assess do they have all their bases covered and to what degree and where should we focus on. That’s that marketing piece. With the Google Analytics, we’ll talk to the CMO or CEO or whoever’s running marketing, etc., and we’ll go from there.
Ryan: How many people do you interact with or come across who are actually doing these things correctly?
Erik: 100% very, very few. They exist but it’s been a handful in the almost four years I’ve been doing this.
Ryan: What are the biggest gaps do you think as far as those three pillars? Where are people usually missing the most?
Erik: Usually, it’s the nurturing piece. Usually people think that they get pressed and they get awareness out there. That’s kind of trust and awareness. Then people just buy but without reminding people. In sales, follow-up is the key and they talk about it all the time. In marketing, people forget that piece.
Ryan: When you’re talking nurturing, it’s a combination of email marketing, follow-ups. Is it individual phone calls, or is it email marketing, automated webinars? What are some of the technical things in the nurturing that you’ve seen that have capitalized in the awareness and trust that people have built, is it email marketing? Is it phone calls?
Erik: No. We’re talking about consumer businesses, phone calls are tough. It’s email marketing, it’s retargeting. Even Facebook messenger and chat bots have been a good one now. It’s all the ongoing communication while someone is trying to make a purchase decision. That’s the nurturing piece.
Ryan: Are there any industries, with our listeners, we had a combo of some young entrepreneurs like you and I and then also a combination of some baby boomers that have had some traditional businesses, the main street service businesses, are there things that you’ve seen that you know they’re not—let’s put it this way, let me rephrase my question.
An HVAC business or someone that’s in the service business or manufacturing, I don’t see them doing a lot of this and I think they’re missing the boat because they have this unfair advantage, they built a sustainable business and applying this stuff, I think the opportunities are huge and understanding where do you start, because I think to accelerate the growth and sell it for a dollar that they want, they have to be moving into this realm. I don’t even think they understand where to start.
Erik: That’s basically why our business has grown so fast. We used to talk about like one of the lines we used to use is we are kind of the navigator of the digital world. It’s hard. That’s like me coming in and saying, “Okay, I want to start a hardware manufacturing business for auto parts. Where do I start?” “I don’t know. Read a lot.” It’s an old business.
That’s what we actually run into. We worked with a lot of manufacturers and traditional businesses on getting into digital and it’s starting a new business. I articulate that to them every time now. It’s like be very aware. What you’re asking me to do for you is you to start a new business. It’s not an easy straightforward thing.
Ryan: That’s interesting because I think that the challenge that a lot of these mature businesses have is it worth to start this new business or is it worth it to just sell it because I think you have to double down. It’s new operations, it’s new talent. It’s having that hybrid of now you’re selling online, you’ve got a presence online. I don’t know exactly what my question would be because I think it’s trying to determine is it worth starting this new business. Is it worth the effort and who’s the champion internally? Because I think a lot of the entrepreneurs, it’s not them, they don’t necessarily want to be.
Erik: Again, it just depends on what your desire is. It’s hard to have someone internally to champion it, that’s what I kept running into, it’s hiring people internally. If you’re not a sexy startup like Dollar Shave, now it’s not anymore but at the time, Dollar Shave Club, this kind of companies, they can attract anyone.
One of my first clients was a manufacturer out in east L.A., in the middle of nowhere, with no place for lunch, it was just like warehouse, it just sucked. Good luck trying to attract a really talented marketer out there for anything less than double what they’re usually paid which is already obscene if they’re a good marketer because a good marketer can make their own money or they’re not very good.
It becomes very hard. That’s really where the impetus of my business model came from. That was hard and I couldn’t find the agencies that were any better so I just started my own. I never planned on building an agency like this. I actually, at that time, was building a tea company, like a drinking tea company that’s on my shelf that I shut down.
Ryan: Crazy. I totally agree with you because there’s a couple companies like yours that have really blown up. Explain what it’s like to start that engagement with you. Like you said, so many people have been burned by agencies and so many people don’t even know what do you Google on Indeed just to say, “marketing specialists”—there’s so many different talents. You’ve got 115 people with different talents. Once you do this assessment of what it is that you want, where do you start with the skillsets? If you were to go to that manufacturing or something, what is plan a to c?
Erik: This is something I’ve learned myself too. It depends on your business and what we’re talking about because it sounds like we’re talking about companies already in the later stage, at that point, you don’t hire young, scrappy people. People still hire their daughter because she has a Facebook, or a son, it’s not a sexist thing, their kid, because they have a Facebook to come and run social media. No, no, no.
I’ve learned a really good, small, basic tip on hiring, once you’re at a point where you need to hire for people to do something and not to learn on your time, when you’re getting to a mid-stage business, you want to hire people that have already done what you’re looking to have to do. You don’t want people to learn, you don’t want someone that’s got a resume that says they have ten years of digital marketing experience, you have to set up a goal and find someone that’s hit that goal already.
It’s like if you want a Super Bowl winning team, hire someone that’s been to the Super Bowl and won. If you want to get to $50 million business through marketing, find someone that’s marketed a business and grown it to $50 million. Get that person. It’s worth paying for if they’re good.
Ryan: I’ll agree with that. I think you nailed it when you said so many people have people learn on their dollar. There’s this biggest connection of like you said, they’re probably building awareness or trust. Whether it’s the people you’re investing in or a late stage business, people have something to say and they’ve got something that’s worth of value but getting that voice out into the world is challenging.
The biggest false notion now is that you can’t track it because you can. Like you said, you can actually put this and show the return on investment if you get it setup correctly.
Ryan: As we’re wrapping up because we’re short on time, Erik, if there’s something you want to highlight or if there’s a takeaway for our listeners as far as growth and exits and valuations, what is something you want to highlight or leave our listeners with?
Erik: I would say at the end of the day, don’t focus on the sale and you’ll get it. I really believe that. I’ve watched companies, don’t get me wrong, there’s companies that push the limits, grow as fast as they can, burn through cash and sell before they fail but before you do that, build a sustainable business. You have options.
We’ve been offered to sell this company, Hawke Media, 7 or 8 times seriously and probably 30 times not seriously. In that process, we’ve realized, we don’t really want to sell. Don’t get me wrong, if an obscene crazy number that everyone in Hawke Media is going to be rich off of comes through the door, sure. I’m not going to say never but in terms of market valuation, I have no desire to sell right now. I have that option. I don’t have to sell it. It’s a profitable, sustainable business.
It’s really nice to build a business that way and then decide later what you want to do but don’t build to sell. I actually don’t like that way of doing things.
Ryan: Let’s get your definition of a sustainable business.
Erik: Profitable. At a level that you can have a little cushion too in case mistakes happen and hiccups etc. It’s not just like you’re making 1% profit, I mean like real profit. I know that the margin is different with every business but something that can actually sustain if your business goes through a change or a hiccup etc., you’ve got some award chest you’re building over time.
Don’t get me wrong, I know that Amazon is not profitable. I know that there’s certain ways not to be profitable and reinvest but Amazon could be profitable. It’s a little nuance there. In most businesses, that’s the reason you start a business. It’s only the past 20 years that there’s like a whole build to sell mentality came to be. It was really in the late 90s that the first tech boomed.
Now, people forget that business is about making money. That’s why you build a business. It’s maximizing profit. There’s a lot of other cool things you can do in terms of helping around the world and helping your employees and all that but at the end of the day, you need to keep it sustainable. That’s the most important part.
Ryan: I agree and I just want to reiterate because when you say build a sustainable and profitable business, what we talk about a lot on the show—because the strategic acquisition or partnership is ideal for everybody because of the synergies and the people and the talent and the opportunities but if you build a sustainable, profitable business, like you said, you’ll have options because any financial buyer will come in because you’re continuously profitable. Then there’s a plethora of financial buyers out there. If you can’t hit your strategic sale, then you’ve got, like you said, tons of options.
Erik: Yep. Exactly. That’s the thing. It’s just about not limiting your options. I’ve watched friends get stuck in having to sell when they don’t want to. That happened to me basically with Swag Of The Month. I would have loved to keep running that business at that time. I’m happy with the outcome but it was just we didn’t really have any options. We didn’t even try to build to sell but we hit a point. If you’re not even keeping in mind unit economics or building a sustainable business, it gets rough.
Ryan: Erik, what is the best way for our listeners to get in touch with you?
Erik: You can always email me firstname.lastname@example.org and then it’s just erikhuberman on any social media channel, / or @.
Ryan: Perfect. I really appreciate you coming on the show and sharing your stories.
Erik: Yeah. Thank you for having me.
Ryan: I hope you enjoyed the interview with Erik. I loved how much we bounced around because I think all of the topics we’ve talked about are extremely important whether it is raising the money or the valuations or building a sustainable business. But the three main takeaways that I had, I’m going to actually reverse it and say the three questions that I think every entrepreneur needs to answer for themselves to build a sustainable business are one, what is your unfair advantage. I think Erik highlighted that perfectly because knowing why your business and why you have an unfair advantage over your competition is extremely important because you cannot leverage that unless you know that.
Then the second question I think you need to answer is how do you let the world know about your unfair advantage that you have and the unique competitive advantage that they will have if they leverage you and your services, and how do you effectively and repeatedly fuel the growth behind that through a combination of digital marketing and sales that allow you to repeatedly see the growth that you need to because we all need to see that, we all need to get our voices out but we need to focus and really put a plan in place around how we do that so that way, we could see the repeatable increase in revenues and profit.
The third question that I think entrepreneurs, we all need to answer is how do you build a sustainable and profitable business that has options down the road? Because if you focus on the business and not working in the business but focus on building this machine that can fuel growth and that can leverage your competitive advantage, then you will have options just by the nature of what you’re doing and working on the machine and the business that you have created.
I really hope you enjoyed the interview with Erik, he had lots of good pieces of wisdom throughout the interview and if you want to check anything out, look at the show notes. Until next week!